Canadian cannabis overview: a look at the last 5 years of recreational sales

Introduction

Since Canada legalized recreational cannabis in October 2018, the country has seen significant growth in its cannabis industry. This report provides insight into sales growth, pricing, brand development, and product innovation within Canada. Additionally, it highlights some of the largest markets in the country and provides a comprehensive view of where the cannabis industry has been, where it stands currently, and where it is headed.

Report Takeaways

• Sales totals throughout Canada have grown 157% from May 2020 to May 2023.
• While sales have increased year-over-year, it has been slowing for the last three consecutive years. Between 2020 and 2021, sales grew 88.3% but between 2022 and 2023 that number dropped to 11.8%.
• Sales growth appears to come from store count growth rather than growing demand. Average monthly sales per store in Ontario have dropped ~20% in the last year while store count has grown ~40% in the province over the same period.
• Flower as the dominant product category is coming to an end as the category’s share of total sales decreased 15.8% in the last year to nearly a third of all sales. Pre-roll products have grown their share by 23.5% in the same period to bring the category to near parity with flower.
• The number of brands in the Canadian market grew 369% between 2020-2023. The flood of new entrants has contributed to a diminishing median total sales per brand which has decreased 70% in the same period.
• The market is becoming more concentrated. In 2020, the top 21% percent of brands captured 80% of total sales. In 2023, the top 12% capture that same amount.
• After several years of pricing compression, inhalabale products, such as Flower, have seen the price per gram flatten since the start of 2022.
• Consumer preference towards higher THC limits in Edible packages has heavily influenced an EQ price drop of 25.3% for non-inhalables in the last year.
• Inhalable categories, such as Flower, have seen EQ prices level off in the last year and a half, a much-needed break from falling prices over the past two years.
• Infused Pre-Rolls and other high-value products (THC per dollar) are gaining popularity, as are terpene-forward concentrates and Vapor Pen cartridges.

Methodology

Data for this report comes from real-time sales reporting by participating cannabis retailers via their point-of-sale systems, which are linked with Headset’s business intelligence software. Headset’s data is very reliable, as it comes digitally direct from our partner retailers. However, the potential does exist for misreporting in the instance of duplicates, incorrectly classified products, inaccurate entry of products into point-of-sale systems, or even simple human error at the point of purchase. Thus, there is a slight margin of error to consider.

In this report, we examine sales from US Headset Insights markets, which include AB, BC, ON, and SK. While adult use became legal in Canada in 2018 Headset’s historical data begins September of 2019.

Sales Growth

Since Headset started tracking Canadian cannabis sales in the fall of 2019 we have seen steady sales growth throughout the combined provinces of AB, BC, ON, and SK. Sales totals throughout the country have grown 157% from May 2020 to May 2023. During this period ON and BC have seen triple-digit sales increase with 295.8% and 140% respectively. Saskatchewan (71.5%) and Alberta (62.6%) have experienced a smaller increase, though still significant.

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While it is great to see such consistent sales growth in Canada, there are clear signs that growth is slowing. Since 2020, sales growth has consistently shrunk year-over-year from 88.3% between 2020 and 2021 to 29.9% the following year. While as of May 2023, compared to the same period the previous year, sales growth posted an 11.8% increase, the smallest increase since Headset began tracking sales.

Each of the four tracked provinces has experienced cooling sales growth over the last three years. At a macro-level, we know that the pandemic created inflated demand for cannabis which was unrealistic to maintain as the industry returned to pre-pandemic market conditions. Ontario experienced a 144.2% increase in total sales between 2020 and 2021 but only grew by a mere 7% from 2022 to 2023. Saskatchewan on the other hand did not see as dramatic of fluctuations with a 2020 to 2021 year-over-year sales growth of 34.5%. SK had the highest total sales increase from 2022 to 2023 at 24%.

From the data, we can see that much of the sales growth in these markets comes from store count growth rather than growing demand. New stores across the country are servicing existing demand in untapped areas rather than an increase in consumer demand. According to Statista, as of June 2022, there were 1,351 cannabis retailers in Ontario, compared to the 1,737 retailers that are currently authorized in the province, which represents a 29% growth in store count in just one year.

So while we have seen sales grow overall in the Canadian market, the average sales per store have failed to maintain a similar pace. Between 2022 and 2023, average monthly total sales per store in Ontario dropped ~13% from around $203k to $177k. While new municipalities continue to become available such as Mississauga, Ontario’s third-largest city, industry players need to be aware that sales growth is only one metric of success for this very new industry.

Brands

Brand growth in Canada over the last three years has been substantial, to say the least. Since 2020, the count of distinct brands has increased by 369%. However, the rate of brand growth has slowed year-over-year. That being said, with a 27.1% increase in brands between 2022 and 2023 there are still a lot of new brands entering the market.

But with all of these new players entering the game, is there enough sales growth to support them or is tightening competition stymieing their success? Store count growth has added more available real estate for these brands, however, it doesn’t seem to be enough to spread the wealth across all new entrants. Between 2020 and 2023, the median total sales per brand dropped by 70%. Additionally, the total sales in the market have become significantly more concentrated by a subset of top brands. In 2020, the Canadian market followed the classic 80/20 rule, as the top 21% of brands captured 80% of total sales. In 2023, 80% of total sales are captured by the top 12% of brands.

Pricing

Pricing compression has been a major issue across the entire cannabis industry for the last few years. Falling wholesale and product prices erode margins for retailers and brands making it difficult for them to turn a profit. The charts above represent the three-month rolling average of equivalized quantity (EQ) price. That is the price per unit of a product. For inhalables that is the price per gram versus the price per mg for non-inhalables.

In Canada, prices in both product categories have fallen in the years since adult use legalization. EQ price for inhalables, which includes products such as Flower, Concentrates, Pre-Rolls, and Vapor Pens, decreased by 23% between May 2020 and the same month just one year later. However, the following year, the decrease shrunk to only 8.6% and stabilized around the start of 2022, hovering around $8 per gram. EQ prices of non-inhalables reflect the price per milligram (mg) and include products such as Beverages, Topicals, Edibles, Capsules, Tinctures, and Sublinguals. This group of products has shown the reverse trend of inhalables. We initially saw prices increase for this category of products as a result of Cannabis 2.0 which introduced product categories such as Edibles to the Canadian market at the end of 2019. However, over the following years, pricing compression took hold and we saw a decline in EQ price. As of May 2023, EQ price for non-inhalables dropped 25.3% compared to the price the previous year.

So why has the non-inhalable group of categories decreased the largest in the last three years between this year and the last? Well, it likely has a lot to do with changing packaging in the edibles category which accounts for 65% of total sales in our ‘non-inhalable’ cohort. Headset has written extensively about the current state of Edibles being produced and labelled as concentrates due to their extraction method. Headset tracks these products as Edibles in our taxonomy, however, the Concentrate classification by producers has allowed them to produce products with more THC per package which delivers a better value to the customer, think dollars per mg. The current regulation only allows 10mg of THC per package for edibles. However, in the last year with the new extraction method, over half a dozen new Edible products have dosage amounts above 10mg per package. The first five months of 2022 saw only about 4.4% of sales going toward edibles with more than 10mg per package. During the same period of 2023, 20% of Edible sales has been captured by products containing more than 10mg per package. More mg of THC at a comparable product price leads to a big drop in price per mg for the customer.

Basket Analysis

Falling prices are having a big effect on revenue for brands and retailers. In the last two years, the average basket size has decreased by 15.6% while the amount of products per basket has dropped by 5.1% in that same period. This means customers are getting a better value but at the expense of the retailers and brands.

The average discount has also drifted upward steadily in the last two years. The substantial increase in products and brands being offered likely contributes to excess inventory for which discounting or markdowns are often used as a tool by retailers to move stale products. Additionally, discounting, promotions, and markdowns are used extensively to compete for traffic among retailers. However, in addition to falling basket totals, additional discounting further erodes already razor-thin margins.

Product Category

The most obvious macro trend within product categories is Flower’s waning number-one position. Flower at one point captured nearly half the total sales in Canada. However, that number is now closer to a third. This is to the benefit of other categories such as Vapor Pens, Edibles, and most notably, Pre-Rolls which are now nearly at parity with Flower for the most popular product category.

Looking at a slightly different view comparing the first five months of 2022 to the same period in 2023, there are a few category trends that stick out. Pre-rolls have had the most significant rise in the last year with a 23.5% growth in the percentage of total sales. Edibles, Vapor Pens, Beverages, and Concentrates all have seen various levels of growth as well. Wellness products such as Capsules, Topicals, Oil, Tinctures, and Sublingual have continued to lose the little market share they previously possessed, while the percentage of total sales captured by Flower has decreased by 15.8%‍

Growing Product Segments

This chart highlights the top three segments in each category with the largest percent change in total sales from 2022 to 2023. Flower and Pre-Rolls, the two largest product categories, have some notable emerging segments. For Flower, we have seen high growth for ‘Popcorn’ style products, though it is important to note that it is still relatively small in terms of total sales. ‘Popcorn’ nugs are smaller cannabis flowers that are usually considered a “B-grade” bud which typically sells for cheaper. We know that cannabis consumers are heavily value driven so the balance between quality cannabis at a cheaper price has proven to be very attractive in the last year to consumers. In the Pre-Roll category, the ‘Connoisseur/Infused’ segment has really taken off. We’ve seen this trend occurring for a while now in both the US and Canada and it is likely driven again by value and potency. We’ve seen high-potency products such as infused pre-rolls and high-dose beverages perform exceptionally well over the last two years. Terpene-driven products are also hot at the moment. HTE (High Terpene Extract) concentrates have seen sales climb 575% in the last year. This is part of a broader trend that we have seen on display in both the Concentrates and Vapour Pen categories. Consumers are willing to trade some potency for the spectrum of natural flavours that comes from cannabis. Distillate which has high potency at the expense of natural flavours has seen sales shrink 5.8% in the last year. While Rosin, an extract that offers lower potency in favour of higher natural terpene flavour, grew 55.3% in the same period.

Conclusion

Since cannabis legalization in 2018, the industry has developed with mixed results. Canada has been able to produce year-over-year double-digit sales growth and has seen the ecosystem of brands grow 4.5 times over since 2020. However, the industry is facing a variety of problems that potentially pose existential risks to industry players. The current sales growth throughout the country is likely buoyed by store count growth rather than growth in consumer demand. This is cutting into existing retailers’ business on top of the other regulatory, pricing, and tax-related hurdles they face. Pricing compression which has plagued all North American markets has made margins razor-thin, if not non-existent. The focus of the industry participants in the coming years should be working smarter and building a business that understands current trends, tastes, and the competitive landscape.

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